"The most important institutions in human society -- language, law,
money, and markets -- all developed spontaneously, without central
direction." --David Boaz

There are better reasons to avoid economic bailouts than that
they haven't been thought out, they will be administered by an
incompetent organization, and that they will indebt your kids, your
grand kids and the as yet unborn.

But despite that claim by U.S. Treasury Secretary Paulson just
18 months ago, with his proposal for the $700 billion bailout (at least
$810 billion as passed by Congress) of the U.S. financial
establishment, he has now instituted the biggest centralized
governmental intervention in markets in the history of the world. Could
he possibly be right?

For more than four years ... civil engineers have been studying the
destruction of the World Trade Center towers. ... The report confirms a
chilling fact ... After both buildings were burning, many calls to 911
resulted in advice to stay put and wait for rescue. ... Fortunately,
this advice was mostly ignored. According to the engineers, use of
elevators in the early phase of the evacuation, along with the decision
to not stay put, saved roughly 2,500 lives. ...In a connected world,
ordinary people often have access to better information than officials
do.
--Question Authorities: Why it's smart to disobey officials in
emergencies, www.wired.com, Issue 13.06 - June 2005

At base, what saved those 2,500 lives was the nonhierarchical
communication characteristic of a "connected world." Which is why the
internet as-we-know-it was originally funded -- by the U.S. Department
of Defense as "ARPANET."
Even before Al Gore invented it. The Pentagon experts were particularly
worried about a nuclear attack.

What the Pentagon "knew" was that the military's hierarchical "chains
of command" could be easily disrupted -- but decentralized
communications networks couldn't be. So, paradoxically, one of the most
centralized hierarchical structures in the world funded the development
of one of the most decentralized non-hierarchical structures in the
world.

It's counterintuitive to most people, but decentralized
structures really do work better than the centralized alternatives. The
most ubiquitous -- and best -- examples are markets. Especially free
markets. Here's one reason:

.... there will enter the effects of particular information possessed
by every one of the participants in the market process, a sum of facts
which in their totality cannot be known to the scientific observer. It
is indeed the source of the superiority of the market order, and the
reason why, when it is not suppressed by the powers of government, it
regularly displaces other types of order, that in the resulting
allocation of resources more of the knowledge of particular facts will
be utilized which exists only dispersed among uncounted persons.--F. A.
Hayek, "The Pretense of Knowledge," New Studies in Philosophy,
Politics, Economics, and the History of Ideas, p. 27.

In other words, combined, all the folks participating in
markets have more and better usable information than any central
controller possibly can. And they're all free to use it in different
ways.

Which points to another important reason decentralized works
better than centralized. It's called "gamblers ruin" by folks on the
non-casino side of the gambling tables. It's a simple concept: If you
consistently put all your eggs in one basket, someday you'll drop it
and break them all. Centralized structures, almost by instinct,
regularly put all the eggs in one basket. The $700 billion Wall Street
bailout to be administered by the centralized U.S. Treasury, for
example.

Decentralized structures on the other hand, resort to multiple
parallel trial and error (and conceptually-guided trial and error) to
arrive at multiple solutions. And, by the very nature of
decentralization and free association -- and unlike top-down
centralized solutions where R&D is often haphazard at best -- the
R&D is built-in. And, unlike the bureaucrats involved in
centralized plans, the decentralized proponents usually have enough
confidence that their own "bacon" is committed and at stake. As in a
bacon and eggs breakfast, where the hen is involved, but the pig is
committed.

And there's at least another problem with the centralized
approach: As one guy put it, "If you give someone a chance to sit on
their butt and do nothing, they will." If people believe The Godfather
is taking care of things, they don't take care of things themselves.
And, if I don't want to wake up with a horse's head in bed with me, I
better make sure he approves of anything I do decide to do.

If I perceive "The Government" is taking care of it -- or might
take care of it -- or might not approve of what I do to take care of it
-- at worst, I can relax awhile. At best, I can forget about it
entirely. I egotistically call this "White's Law of Halo Damping." My
personal response is damped within the halo of perceived government
action.

"I think the small and medium sized businesses absolutely -- and
consumers can [get a loan]. I think before, we weren't risk aversive
enough ...It's all the uncertainty out there and I think until we get
the [Paulson] package announced, that uncertainty will remain." --Jon
Evans, CEO, Atlantic Central Bankers Bank, CNBC, September 25, 2008

...We have to see what type of relief is put forth here.
...we are waiting for that magic bullet that would free up our capital,
give us some certainty as to valuation -- what the examiners,
regulators expect from our balance sheets. --Damian Kassab, Chairman
& CEO, Warren Bank Holding Company, CNBC, September 26, 2008

Some traders are suggesting there won't be a bottom until the markets
rally on a day when the government does nothing. --Becky Quick, Squawk
Box, CNBC, October 10, 2008

So clearly, we should shun centralized plans and "solutions."
But it's well to remember that doesn't mean no plans or solutions. Far
from it:

What those calling themselves planners advocate is not the substitution
of planned action for letting things go. It is the substitution of the
planners own plan for the plans of his fellowmen. The planner is a
potential dictator who wants to deprive all other people of the power
to plan and act according to their own plans. He aims at the one thing
only: the exclusive absolute preeminence of his own plan." --Ludwig von
Mises

That "one thing only" would, in this case, be "the exclusive
absolute preeminence" of the "all-eggs-in-one-basket" Paulson Bailout
Plan of course - - - to the detriment of normal decentralized
free-market forces and all that information, talent, tested variety and
personal involvement they would otherwise bring to bear.

So the government doing nothing isn't really doing nothing.
Far from it.

An email
sent to CNBC suggested calling Paulson's plan the "Securitized
Housing Investment Trust." If you don't mind an R-rating, do the
acronym.

Proposing centralized plans is often a symptom of sincere
ignorance. Decentralized structures, by their nature, are hard to
perceive and usually impossible to see or touch. This regularly causes
consternation among a wide variety of folks. Imagine someone who
doesn't understand "wind" trying to explain a flying kite - - -

Writing of the era just before Mikhail Gorbachev came to power,
[Arkady] Schevchenko reported that top Kremlin officials "are simply
baffled by the American system. It puzzles them how a complex and
little-regulated society can maintain such a high level of production,
efficiency, and technological innovation. Many are inclined toward the
fantastic notion that there must be a secret control center somewhere
in the United States. " --Michael Rothschild, Bionomics; Economy as
Ecosystem, (New York: Henry Holt and Company, Inc. 1990), p. 257

At that point in history the now defunct U.S.S.R.'s economy
was centrally planned by Gosplan.
Remember all those five-year plans that, because of failure, became
ten-year plans, fifteen-year plans, twenty-year plans? The Soviet
oligarchs couldn't conceive of a system that worked better -- even
though it was staring them in the face.

So, while you can point to the Pentagon, pointing to the wind
that floats that kite is a little harder.

Even worse, the superiority of decentralized "structures" is
even harder to recognize than the fact that they exist.

Yet Mr. Paulson and a bevy of other influential wonks, against
the advice of many other influential folks (and the will of the
American people) shamelessly pimped the U.S. Congress -- for the second
time -- to pass some version of Paulson's massive $700 billion bailout
of the U.S. Financial establishment. And, Congress, true to their
nature, indulged itself. At our expense.

Despite specious promises of big returns to future taxpayers
(read "future governments"), Paulson's plan will be paid-for with
taxpayer money, and financed not only by you, but by your kids,
grandkids and the yet unborn. It may well lead to Gosplan-like control
of the U.S. economy -- with equivalent success. And Paulson's doing it
in direct opposition to his own pronouncement, made only 18 months ago
-- with a centralized plan that marginalizes, pre-empts, and disrupts
the decentralized processes that consistently prove to be superior.

Is there any possible way this could be a good idea?

L. Reichard White
specializes in games theory and self-motivation in enterprises with
uncertain outcomes. He supported his writing habit for over 30 years by
beating casinos at their own games. You can find other dubious results
from that obnoxious habit here.